Headnote National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions – Exemptive relief granted to an exchange traded fund from certain mutual fund requirements relating to calculation and payment of redemptions – Relating to new issuance of preferred shares – Since investors will generally buy and sell units through the TSX, there are adequate protections and it would not be prejudicial to investors – National Instrument 81-102 – Mutual Funds
Applicable Legislative Provisions
National Instrument 81-102 – Mutual Funds, subsections 10.3 and 10.4(1).
February 17, 2011
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the “Jurisdiction”)
AND
IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF ALLBANC SPLIT CORP. II
(the “Filer”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for relief from the following sections of National Instrument 81-102 Mutual Funds (“NI 81-102”) with respect to the Class B Preferred Shares, Series 1 (the “Series 1 Preferred Shares”) proposed to be issued by the Filer as described in a preliminary prospectus dated January 14, 2011 (the “Preliminary Prospectus”):
(a) section 10.3, which requires that the redemption price of a security of a mutual fund to which a redemption order pertains shall be the net asset value of a security of that class, or series of class, next determined after the receipt by the mutual fund of the order; and
(b) subsection 10.4(1), which requires that a mutual fund shall pay the redemption price for securities that are the subject of a redemption order within three business days after the date of calculation of the net asset value per security used in establishing the redemption price
(collectively, the “Exemption Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the Filer has provided notice that section 4.7(1) of Multinational Instrument 11-102 Passport System (“MI 11-102”) is intended to be relied upon in the jurisdictions of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
The Filer was incorporated under the Business Corporations Act (Ontario) on December 7, 2005 and completed its initial public offering of Class A Capital Shares and Class A Preferred Shares. The Filer’s head office is located in Toronto, Ontario. The Filer is not in default of securities legislation in any province of Canada.
On December 7, 2010, the holders of the Class A Capital Shares approved a share capital reorganization (the “Reorganization”). The Reorganization will permit holders of Class A Capital Shares to extend their investment in the Filer beyond the redemption date of February 28, 2011 for an additional 5 years. The Reorganization also provides holders of Class A Capital Shares with a special right of retraction (the “Special Retraction Right”) to replace the originally scheduled final redemption. Under the Reorganization, holders of Class A Capital Shares who do not wish to extend their investment may choose to have their shares redeemed on February 28, 2011. If the Reorganization is not implemented, the Special Retraction Right will not become effective and the Class A Capital Shares will be redeemed by the Filer on February 28, 2011 in accordance with their terms.
The Series 1 Preferred Shares are being offered in order to maintain the leveraged “split share” structure of the Filer and will be issued on February 28, 2011 (the “Offering”) such that there will be twice the number of Class A Capital Shares as Series 1 Preferred Shares outstanding on and after February 28, 2011.
The Filer will make the Offering to the public pursuant to a final prospectus (the “Final Prospectus”) in respect of which the Preliminary Prospectus has already been filed.
The Class A Capital Shares will continue to be listed and posted for trading on The Toronto Stock Exchange (the “TSX”) and the Series 1 Preferred Shares are expected to be listed and posted for trading on the TSX. An application requesting conditional listing approval has been made by the Filer to the TSX.
The primary undertaking of the Filer is to invest in the common shares of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank (the “Portfolio Shares”) in order to generate fixed cumulative preferential distributions for the holders of the Filer’s Series 1 Preferred Shares and to enable the holders of the Filer’s Class A Capital Shares to participate in any capital appreciation in the Portfolio Shares and to benefit from any increase on the dividends payable on the Portfolio Shares. The Portfolio Shares are the only material assets of the Filer.
The net proceeds of the Offering (after deducting the agents’ fees and expenses of the issue), depending upon the number and value of Class A Capital Shares redeemed pursuant to the Special Retraction Right, will be used by the Filer to fund the redemption of all of the issued and outstanding Class A Preferred Shares of the Filer on February 28, 2011 as well as those Class A Capital Shares being redeemed pursuant to the Special Retraction Right together, with the net proceeds from the sale of a portion of the portfolio, if necessary.
It will be the policy of the Filer to hold the Portfolio Shares and to not engage in any trading of the Portfolio Shares, except:
(i) to fund retractions or redemptions of Class A Capital Shares and Series 1 Preferred Shares;
(ii) following receipt of stock dividends on the Portfolio Shares;
(iii) in the event of a take-over bid for any of the Portfolio Shares;
(iv) if necessary, to fund any shortfall in the distribution on Series 1 Preferred Shares; and
(v) to meet obligations of the Filer in respect of liabilities including extraordinary liabilities.
Series 1 Preferred Share distributions will be funded primarily from the dividends received on the Portfolio Shares. If necessary, any shortfall in the distributions on the Series 1 Preferred Shares will be funded with proceeds from the sale of Portfolio Shares, or, if determined appropriate by the Board of Directors, premiums earned from writing covered call options on Portfolio Shares.
The record date for the payment of Series 1 Preferred Share distributions, Class A Capital Share dividends or other distributions of the Filer will be set in accordance with the applicable requirements of the TSX.
The Class A Capital Shares and Series 1 Preferred Shares may be surrendered for retraction at any time. Retraction payments for Class A Capital Shares and Series 1 Preferred Shares will be made on the Retraction Payment Date (as defined in the Preliminary Prospectus) provided the Class A Capital Shares and the Series 1 Preferred Shares have been surrendered for retraction no later than five business days before the 15th day of a month. While the Filer’s Unit Value (as defined in the Preliminary Prospectus) is calculated weekly, the retraction price for the Class A Capital Shares and the Series 1 Preferred Shares will be determined based on the Unit Value in effect as at the Valuation Date (as defined in the Preliminary Prospectus).
Any Class A Capital Shares and Series 1 Preferred Shares outstanding on February 28, 2016 will be redeemed by the Filer on such date.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator is that the Exemption Sought is granted as follows:
(a) section 10.3 – to permit the Filer to calculate the retraction price for the Series 1 Preferred Shares in the manner described in the Preliminary Prospectus and on the applicable Valuation Date as defined in the Preliminary Prospectus; and
(b) subsection 10.4(1) – to permit the Filer to pay the retraction price for the Series 1 Preferred Shares on the Retraction Payment Date, as defined in the Preliminary Prospectus.
“Darren Mckall”
Darren McKall
Assistant Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR Project No. 1687403